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Home Capital defends mortgage practices

Canada's largest alternative mortgage provider says loans based on false income claims are safe.

Toronto-based Home Capital Group y disclosed late Wednesday that its operating arm, Home Trust, had cut ties with 45 mortgage brokers after discovering some mortgages had been issued based on falsified income claims.
AP FILE PHOTO

Canada’s largest alternative mortgage provider moved swiftly to reassure investors Thursday that loans made to borrowers based on falsified income documents were not at risk.

Home Capital Group Inc. also said most of the mortgages in question were insured and that mortgage insurers, such as CMCH, would cover them if they went into default, despite being issued on a false basis.

“All of the insurers have conducted audits. They’ve looked at the files. There has not been the slightest suggestion that if there is a claim or there was a problem that they wouldn’t pay it,” Home Capital chief executive officer Gerald Soloway said on a conference call with analysts.

The Toronto-based company disclosed late Wednesday that its operating arm, Home Trust, had cut ties with 45 mortgage brokers after discovering some mortgages had been issued based on falsified income claims.

These brokers initiated nearly $1 billion in new mortgages for Home Capital in 2014, the company said. But only a small portion of the $960.4 million in loans was issued based on falsified income documents, the company said.

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As well, those mortgages are performing as well, if not better, than its total portfolio of residential mortgages, the company said.

Soloway said that’s because in some cases additional income earners living in the home are helping to carry the loan.

Home Capital’s clients include the self-employed, recent immigrants and other groups that have trouble qualifying for mortgages at major banks.

Home Capital said it was following standard industry practice when it accepted employment letters as sufficient evidence of borrower’s income.

However, the company said it has introduced new procedures that include creating a specialized team to independently verify borrowers’ income claims.

The brokers were not at fault nor is there any evidence Home Trust staff was involved, Home Capital said.

The problems occurred when someone tampered with the borrower’s employment letters to inflate their incomes, Soloway said.

Some of these letters had been altered to show the person was making $84,000 instead of $64,000, Soloway said.

The brokers who were cut loose are among 4,000 the company uses and accounted for just 5.3 per cent of the more than $17 billion in outstanding loans on Home Capital’s balance sheet, the company said.

The borrowers’ credit scores and the properties’ appraisal values were not in dispute, the company also said.

The company’s stock gained 13 per cent Thursday to close at $32.17 per share on the Toronto stock Exchange. It’s down 33 per cent so far this year. Separately, the company reported second quarter results showing profit before one-time items of $1.03 per share, down slightly from $1.05 per share a year earlier.

The company, which has been the target of short sellers, said the documentation issue came to its attention through an anonymous letter sent to its board of directors.

It launched an internal investigation, while also advising CMHC and OSFI (Office of the Superintendent of Financial Institutions), which is the federal regulator, of the allegations.

Short sellers, who make money on a company’s shares by betting they will fall, see Home Capital as a way to play the odds that Canada’s housing.

The company had disclosed on July 10 that mortgage originations had fallen in the first half of the year, citing an ongoing review of its relationship with its partners, among other things.

Home Capital said it had been asked to disclose more details this week by the Ontario Securities Commission, Canada’s largest stock market regulator.

CMHC said it expects lenders to ensure all applicants provide supporting documentation, including evidence of employment and income. It may not honour a claim where there is evidence the lender or their staff is involved with fraud.

OSFI said it was not allowed to discuss individual institutions it regulates.

Correction — July 31, 2015: This article was edited from a previous version that mistakenly referred to OSFI as a provincial regulator.

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